Euro Crisis: Grexit Now the Spexit

The more you read and write on this topic, the more you explore every time. Grexit? Spexit? and many more terminologies to hear as the crisis deepens. I did more than a dozen post where the recent one covers the EU submit and the Euro 2012 soccer cup Euro and European champions.

The aftermath to last weeks EU summit has certainly proved to be a damn sight more perplexing than the actual summit itself. Contrary to earlier experiences, this time round the more the details have been “clarified” the more confused we have become.

Just what exactly was approved? Will Spain’s banks really obtain capital directly from the ESM, and if so, how and when? Is Spain about to get a full bailout? Is Italy? Is there a commitment to bringing down sovereign borrowing costs. And just to top it all of what about Greece, what is the next move, is there any kind of plan?

To confirm the above yesterday Italian PM Mario Monti said the return of sovereign bond yields to dangerous levels seen before the EU summit a concern needs to be resolved by the euro zone Ministers of Finance. The Spanish bond yield rose again to 10 years over 7% on friday after it vanished the impact of EU summit, where as Italy has also seen an increase in their yields over 6%.

The broad level of spreads is on sovereign debt in several countries of the euro areas is a concern for financial stability in the Euro area.

I think it is plain that Spain’s bank recapitalisation will be, kicking and screaming, an all Euro Group affair. That is to say the debt sharing the Finnish Finance Minister so desperately fears will take place even if we take a while to get there. And Spanish and Italian bonds will be bought, even if we need to take a quick look down into the abyss just one more time first. But these measures alone won’t save the Euro, only getting the periphery back to growth can do that, and at the moment the suggestion box seems to be empty on that count. Structural reforms alone will work neither far enough nor fast enough.
As we can see from yesterday’s (Friday) movement in Spanish yields, market participants have been left busily scratching their heads. Is the delay in bond purchases only temporary, or is there a more substantive problem looming?

In addition the Finnish finance minister has now gone further, and suggested that her country might feel forced to leave the Euro zone should debt sharing – implicit in the direct bank recapitalisation – be agreed to.

The consequence is that with a “clean” implementation of the decision the entire Euro Area will now stand behind Spain’sbanks, as will Germany as part of the Euro Area, and indeed all countries in the monetary union would become part-owners of at least some of Spain’s banks. As Angela Merkel said last week, Germany can only thrive if her neighbours do, and now the German’s will become stakeholders in the financial institutions of one of those very neighbours.